Monday, February 15, 2010

Are Dividends Important?

To cut a long story short, Jeremy Siegel showed in his book "Stock for the long run" that had bought a high yielding stocks, and reinvested the dividends, your returns would have beat all asset classes by a wide margin.

That is the American context. locally in Singapore, there are not many stocks that offer reinvestment scheme. from what i can remember, Keppel Corp has a reinvestment scheme, while OCBC and Pacific Andes have scrip dividend.  A scrip dividend is one whereby you recieve stock instead of cash. There is of course the problem of what do you with the odd lots. For that, you have to talk to your broker or try to sell odd lots with your electronic platform. This might incur additional costs.

Back to the main point, dividends are important for someone with a long investment horizon because Capital Appreciation is prone to fluctuation and volatility. Dividends of course are affected by earnings which are in turn affected by the business cycle. But the thing is, you do not have to sell the stock to recieve this cash inflow, hence reducing transaction costs. You must however not buy a company that will expire or is giving a generous dividend because it is going to hollow out as in the case of Achieva or say Thakral.

To give an example, you bought UOB Kayhian at $0.97 that comes with dividend of $0.05 (interim and final) working out to slightly more than 5% yield. Assume you hold it 5 years with a constant dividend of $0.05 and an ending price of say $1.10, you would have made $0.10 in capital gains with $0.25 in dividends.

Yes, these are simple assumptions. moreover there is no way to predict the end price of any stock. but the pertinent point is that, if you want a decent returns from your stock portfolio, be sure to buy good stocks that offer a good initial yield.

Initial yield is the expected dividend over the price bought. Some companies like SingPost offer very solid dividends. In fact, i recommended it to a few friends because it is a cash generating that might have to restructure and redistribute some of the assets it will eventually sell.

Food for thought

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